Mutual funds are a pool of investments drawn from various investors having the same investment objectives. However, managing these funds alone is quite difficult for investors; here, the Asset Management Companies (AMC) come into the scene.
These AMCs manage the funds by the investors and ensure the investments go towards growth. These AMCs charge a small amount of fees whenever an investor exits or redeems the units of a fund. This fee is called the Exit load.
An exit load is the fee AMCs (Asset management companies) charge the investor at the time of exiting or retrieving the units of the fund. The primary reason for levying exit load is to discourage investors from backing out and pulling out their investments before the lock-in period is over.
Additionally, the exit load fee may also reduce the withdrawal numbers from the mutual fund schemes. However, not all funds levy an exit charge on investors. Hence, you need to keep in mind the ‘exit load aspect’ while choosing a plan to invest in.
Exit load meaning in mutual funds, can be understood as a percentage of the Net Asset Value (NAV) of the mutual fund an investor possesses. The Net Asset value is the net value of an entity and is calculated as the entity’s assets minus the value of its liabilities.
Usually, the AMCs deduct the exit load from the total NAV and the remaining amount gets credited to the investor’s account.
Let's understand with an example
For instance, if the exit load levied on a one-year scheme is 2% and is redeemed within 4 months, which would be much before the agreed period of investment.
So, here an exit load comes into the scene. If the NAV of the fund is Rs.40 during the time of redemption, the exit fee charged would be 2% of Rs. 40, which is equal to 0.8. After deducting this amount from the NAV, which is Rs. 39.20 gets credited to the investor.
Moreover, if the investor completes the agreed tenure of the funds, then he/she won’t have to pay the exit load at the time of redemption.
The rates of exit load depend on the type of mutual funds; different mutual funds charge different exit loads.
Suppose an investor invested Rs. 30,000 in a mutual fund scheme in January 2022. The plan has an exit load of 1% if redeemed before 1 year. The NAV is Rs. 100, which means that the investor has 300 units.
Now, if the investor wants to redeem the units after 4 months, i.e. in May 2022. In this case, the investor will be paying an exit load as per the calculation:
| Amount invested in January 2017 | 30,000 |
| Net Asset value at the time of investment | 100 |
| Units Bought | 30000/100=300 |
| NAV at the time of redemption | 90 |
| Exit Load | 1% of (90*300)= 270 |
| Final Redemption Amount | 27000-270=26730 |
Different mutual funds charge different rates of exit load. However, not all mutual funds levy exit load on investors. It is advisable to check the exit load of the mutual fund schemes you are interested to invest in.
Let’s check out some rates on mutual funds
Most investors are usually perplexed to understand the ‘Exit Load’ concept when investing through SIP.
Exit load on SIP might be a tad bit different. Every investment in SIP is treated as a fresh purchase, so exit load may be charged accordingly depending on your SIP instalment amount and your redemption amount.
Exit Fee is a vital factor for an investor to be aware of while investing. You should be meticulous before proceeding with a Mutual Fund scheme as it helps you to estimate the returns once all the other expenses are settled.
No investor would ever want to get a fine in the form of an exit load unknowingly. Exit Load can take a toll on you and your planned investments; it can be avoided if you plan your sale of units judiciously.
Related Mutual Fund Pages
List of AMC in India